https://newleftreview.org/sidecar/posts/sinking-ship
Matteo Tiratelli & Ali Helwith
05 November 2024Economics

In Britain, the history of public provision is a history of austerity. From the earliest experiments with ‘public works’ in the 1530s to today’s Department of Work and Pensions, social and economic crises have always forced the state to step in and provide for those in need. But at every stage, that provision has been constrained by the state’s inability to pay for it. The consequences are often devastating, from inmates fighting over bones in the old Andover workhouse to the deaths of disabled people struggling on Universal Credit.

Yet this tradition of austerity has never led to prolonged reversal of entitlements. Instead, expectations of what the state will provide have expanded over the centuries, with the ‘monopoly of violence’ now only a tiny part of its remit. The British government still spends £55bn a year on defence and £44bn on ‘protection’ (police, prisons, courts, immigration detention centres and the rest), but this is dwarfed by the £320bn it spends on welfare, £210bn on health and £105bn on education. The state is as far away from the libertarian fantasy of a limited nightwatchman as it is from the left’s dream of a social-democratic leviathan.

The Labour government’s inaugural Budget, announced on October 30, is marked by this tension. While it includes the largest set of revenue-raising measures in three decades, it remains inadequate to address Britain’s deep social malaise. Unveiling it last week, Chancellor Rachel Reeves insisted that ‘the only way to drive economic growth is to invest, invest, invest’. New funds would be unlocked for infrastructure projects and public services, which are ‘on their knees’ after fourteen years of Tory neglect; an extra £40bn would be collected from taxes and fiscal rules would be tweaked to allow for more government borrowing. Yet beneath these headline policies, the logic of Reeves’s plan is rigidly austerian. Its 3.6% annual uplift in NHS spending is less than at any time under New Labour, despite record waiting lists and an ageing population, and the £3.1bn earmarked for capital investment in health is dwarfed by a repairs backlog of £13.8bn. Likewise for education, the announcement of £2.2bn for investment in the schools estate falls far short of the £11bn worth of repairs needed. There will be no real term increase in spending for housing, transport and justice, while the Department for Culture, Media and Sport and the Cabinet Office continue to face cuts.

Moreover, Reeves’s changes to the fiscal rules exclude ‘day-to-day’ costs – which, as the economist Sahil Dutta points out, restricts how much can be spent not only on health and education, but also on childcare and adult social care: two sectors in acute crisis. In areas where the state is more willing to fork out, much of the extra cash will likely go towards attracting greater private investment: encouraging predatory asset managers to appropriate more of Britain’s public goods, from housing to utilities to renewable infrastructure. These ‘public-private partnerships’ threaten to extend the power of big finance while entrenching inequalities, while the £40bn in tax rises will barely maintain the current – exceedingly low – standards of public sector provision. The Office for Budget Responsibility forecasts that under this government public-sector investment as a share of GDP will fail to match the levels seen before 2010.
Public spending as a proportion of GDP, 1850-2023

To understand the Budget, however, we must also examine the institution that designed it. His Majesty’s Treasury is the most powerful entity in one of the most centralized bureaucracies in the Western world. As both banker and accountant for the central government, it sees itself as the guardian of ‘taxpayers’ money’, a counterweight to idealistic politicians and excitable civil servants, as well as the key player in stimulating economic growth. While regular Budgets deal with taxes and receipts, the main process through which different parts of the state are allocated resources is the Spending Review, which normally takes place every three to five years and outlines the government’s plan for all future expenditures. The Treasury initiates this vast and convoluted process by setting departmental targets and determining how to measure them, and concludes it by making the final decision on how to divide up the government’s overall resources. While there is some role for politics in the Spending Review – the Treasury’s targets are tied to the government’s objectives – Parliament is merely a bystander. As the Hansard Society puts it, the UK ‘has among the weakest systems for parliamentary control and influence over government expenditure in the developed world’.

As well as controlling where the money goes, the Treasury also exerts a powerful ideological influence over other branches of the state. Since Thatcher’s politicization of the civil service in the 1980s, the Treasury’s mantra of ‘efficiency and accountability’ has created a culture of targets and ‘performance indicators’ across the entirety of government. A brief spell at the Exchequer has also become an essential stepping stone for ambitious civil servants from other departments, ensuring that future leaders are well-versed in the catechisms of fiscal orthodoxy. And when a firmer hand is needed – for instance during the austerity drive of the 2010s – Treasury officials are often parachuted directly into other departments.

The Treasury also imposes its authority by controlling how government programmes are implemented. Sometimes this is done through formal channels: the recently announced Office for Value for Money will allow the Treasury to investigate projects for any ‘waste’ or ‘inefficiencies’ and undertake widespread system reform. At other times it is more a matter of influence and persuasion: in the wake of the Covid-19 school closures, for instance, the Treasury pushed for the state to give lucrative contracts to private tutoring companies, despite clear evidence that they are of little benefit to disadvantaged students. Indeed, the Treasury tends to encourage outsourcing in all situations, with the result that ‘procurement’ is now the single biggest type of public spending. This often means giving money to companies who specialize in winning government contracts and not much else, who then subcontract the work to other firms who take a cut before passing the job onto other agencies further down the chain – massively inflating the overall costs.

The Treasury also likes to set fiscal targets that are easy to measure in pounds and pence over a short time scale – a preference with profound implications for where departments decide to direct their funds. Take education: the annual flow of money to schools can be easily predicted and adjusted, with conditions placed on any spending above a certain limit. By contrast, larger capital investment for school buildings and playing fields is seen as riskier, with benefits that are harder to quantify and often scored outside of a spending review window (or outside a politician’s stint as Treasury minister). One is therefore prioritized over the other, which helps to explain why Britain’s schools are crumbling.

The sociological makeup of the Treasury is significant in reproducing this ideology. Not only has every top Permanent Secretary to date been a white man; since World War II, half have been privately educated, and almost all the rest attended selective grammar schools. Nearly 70% then went to either Oxford or Cambridge: a level of demographic uniformity that stands out even in the famously unrepresentative civil service. The institution is also characterized by a remarkable narrowness of intellectual background, with all but one of the Permanent Secretaries since the 1980s holding undergraduate degrees in economics and the vast majority having had long careers in the department. These ‘Treasury Men’ have a highly particular outlook on the relationship between state and market, which takes the liberal tradition as gospel.

Despite the Treasury’s fiscal conservatism, forces pushing in the opposite direction have been difficult to resist. Over the last century, state provision of education has grown enormously, both as a way of training future workers and as a response to pressure from working-class parents demanding greater opportunities for their children. This has caused the school leaving age to rise and higher education to expand. Yet, as per the logic of austerity, it has not been matched by steady increases in funding. Instead, education spending has been roughly cyclical, with per pupil investments decreasing in the 1980s, before increasing in the 2000s, falling again after 2010 and then rising sharply over the last five years.

There is a similar pattern of expansion and retrenchment in the welfare branches of the state. The Department of Work and Pensions provides a demand-led service, where budgets are not set in advance but estimated on the basis of how many people the civil service thinks will need state support. In one sense, this makes welfare responsive to direct political influence. A government can decide on new levels of entitlement and implement them within months (hence Starmer caving to Treasury officials and cutting the winter fuel allowance). But in the long run, the key determinants of welfare spending – benefits, health, social care – are structural and demographic. About half of the DWP’s budget now goes to pensioners, who will continue to consume a larger proportion of government spending as the population ages. Benefits for those of working age account for just under a third of welfare payments: a figure that closely tracks the booms and busts of the economic cycle. The next largest category is disability benefits, which have shot up over the last 40 years, reaching 11% of total expenditure. They have long surpassed child benefits, which have fallen to just 4% of the DWP’s budget. While political imperatives play a role, this kind of state expenditure is largely determined by the exigencies of an ageing and ailing population.

The Tory administrations of the 2010s sought to sharpen this contradiction between rising provision and fiscal restraint – claiming that the two were impossible to reconcile, and that the state would therefore need to abandon some of its social responsibilities, relying on private and charitable enterprises to fill the gap. They largely succeeded when it came to unemployment benefits, and came close with healthcare, starving the NHS of funding as a means of gaining passive consent for privatization. Amid growing pessimism about the quality and availability of public services, alternatives are sought by those who can afford them. This is most visible in the health sector, where privately funded elective procedures grew by more than 10% in the last three years with an increasing number of people now paying for private insurance. We have also seen a collapse in social housing, a shift towards private pensions and greater uptake of privately funded higher education.

Yet there are countervailing tendencies as well. In the short term, Labour is dependent on the votes of public-sector workers who have proven their willingness to defend state services through industrial action. As the population continues to age, calls for intervention in areas like health, social care and pensions are getting louder; and in an increasingly immaterial economy, demands for investment in education are on the rise. Over the last 150 years, despite serial assaults on the working class, democratic pressure for public provision has proven remarkably resilient. Ultimately, though, the state can only break out of this pattern of simultaneous expansion and austerity if it exerts much greater control over capital. Without that, it will always be starved of funds and hostage to private finance. This is the major challenge for the twenty-first-century left: not only to organize a broad movement for public provision, but to build a state strong enough to discipline capital and extract the resources it needs.

The fallout from Labour’s Budget shows how daunting this task will be. Reeves’s public investment measures were modest by any standards: nowhere near enough to ‘rebuild Britain’, and more likely to redouble the country’s power imbalances than to redress them. Even so, they prompted bond markets and debt rating agencies to go on the offensive. Hours after the plan was announced, yields on government bonds hit an annual high, increasing the cost of borrowing for a state that already counts debt servicing as its third largest form of expenditure. The next day, Moody’s warned that the Budget had created an ‘additional challenge’ for the all-important goal of fiscal consolidation. By that weekend, Starmer had taken to the pages of the Financial Times to placate the markets with an offer of ‘tough’ public sector ‘reforms’ and an attack on ‘overweening regulators’.

For the investor class, the United Kingdom is now a middle-income economy with a high-income mentality, which must learn to live within its means. Rather than using the state to challenge this orthodoxy, the Labour government has accepted it wholesale. Without the traditional tools of social democracy – redistributive taxes, public ownership, countercyclical stimulus – it has no means to resolve the long-running conflict between provision and austerity. It may hope that its spending plans will marginally increase growth and productivity over the coming years, but any return to the dynamism of the Keynesian era seems unlikely, and financial markets can mobilize against any budgetary decisions that stray from the path of fiscal prudence. This leaves the state at the mercy of global market forces. Capital continues to reign supreme, with the Treasury its handmaiden.